China's big banks are not delivering on their promise to lend more to the smallest firms and are instead "faking" their micro loans, a researcher said on Saturday, suggesting a government drive to increase micro-lending is struggling.
Ba Shusong, a researcher from the Development Research Center, a think-tank that advises China's cabinet, said the biggest Chinese banks are still setting tough collateral standards for small firms, who often cannot meet the demands.
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This leaves 60 percent of small Chinese firms without bank financing, Ba said, citing a study that he led on funding conditions for small and micro-sized firms.
China wants to increase financing for its small businesses and has ordered its state-controlled banks to step up lending to them to avoid a repeat of a 2011 cash crunch, which some analysts had worried could destabilize the banking system.
"Everyone right now talks about financing for small and micro sized firms," Ba said. "There is a portion of big banks who are faking their lending to small and micro-sized firms," he told a forum in Boao in southern China, without further details.
The study that surveyed 1,000 small and micro-sized Chinese firms across a dozen sectors showed only 40 percent of companies have loans from banks right now.
And despite China's central bank cutting interest rates twice by a total of 50 basis points last year to spur a domestic economy trapped in its worst downturn in 13 years, the study said 66 percent of firms have not seen their funding costs fall.
Instead, 40 percent of firms said they pay interest rates of over 10 percent, while the rest have financing costs of between 6 percent and 10 percent. A third of companies said financing costs are their biggest cost
China's one-year benchmark interest rate, targeted by the People's Bank of China when it changes monetary policy, stands at 6 percent.
"The lack of appropriate collateral is one of the basic sources of financial difficulty for small and micro businesses," the study said.
Banks often demand companies to stump up property as a collateral or a guarantee before they get a loan, it said, even though the survey showed 83 percent of businesses do not own their own factory space.
The study recommended that banks expand their pool of acceptable collateral to include orders, warehouse warrants, equity and intellectual property.
Though modest in size, small businesses punch above their weight in China, accounting for three of every four jobs and 60 percent of the nation's output. But they are often turned away by banks who favor big, state-owned companies.
Small businesses took a beating in 2011 when a succession of rate hikes by China's central bank slowed the Chinese economy and dramatically raised their borrowing costs in the kerb market to over 30 percent for some.
(Reporting by Koh Gui Qing and Shenyan; Editing by Michael Perry)